Restrictive covenants or undertakings

These are undertakings given by employees during employment or on termination which restrict their conduct or activities. Due to historic debate as to whether payments given for such restrictive covenants or undertakings fell within general earnings under the relevant income tax acts, there is a specific charging provision which ensures that such payments made in connection with current, future or past employments or offices are taxable as earnings.

Tax treatment

Section 225 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003) taxes payments made to an individual for entering into restrictive covenants. In order for consideration to be brought into charge, the following conditions must be satisfied by the individual:

1. •

   a restrictive undertaking is given in connection with a current, future or past office or employment

2. •

   the undertaking must restrict conduct or activities; it may be absolute or qualified and need not be legally binding

3. •

   a payment is made in respect of the giving of the undertaking or its partial or total fulfilment; it does not matter to whom the payment is made

4. •

   the sum would not otherwise be treated as general earnings, and

5. •

   any earnings from the same employment would be taxable in the UK because the individual is UK tax resident or a non-UK tax resident with UK duties

If an asset or other valuable consideration is given instead of